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The looming debt ceiling fight, explained

It’s probably going to be fine. But maybe not.

Back in 2011, the federal government’s statutory debt ceiling, an obsolete vestige of World War I-era public finance, was successfully transformed by House Republicans from a cheap partisan talking point into a sharp-edged spear used to extract policy concessions. The result of their efforts was a brush with national economic calamity, followed by the imposition of a severe fiscal austerity regime that caused a few years’ worth of slow-burn economic pain.

Having faced the abyss, both parties backed away from it in subsequent rounds of negotiation. The changed partisan dynamics in Washington since Donald Trump’s election should have made the debt ceiling increase scheduled for this fall relatively straightforward — Republicans could just do it and move on.

Except it turns out that nothing in the age of Trump is exactly straightforward. The administration spent months offering no clarity on whether it even wanted a simple increase in the debt ceiling. That emboldened the right flank of congressional Republicans, who don’t want to raise the ceiling without also cutting federal spending in the process.

Freedom Caucus members have no real leverage to force legislative changes, but if they won’t vote for what’s known as a “clean” debt ceiling increase — one that is not attached to spending cuts or any other bills — that puts some leverage in the hands of congressional Democrats, whose votes GOP leaders will be counting on to get an increase done.

Democratic leaders, meanwhile, have been hesitant to engage in the kind of irresponsible brinksmanship that they condemned Republicans for six years ago. But backbenchers in safe seats are feeling restive, and with the next item on the Trump legislative agenda being a large tax cut, it strikes many Democrats as perverse to be bailing out Republicans on providing additional borrowing authority — authority that Treasury says will be needed next month.

Welcome to debt ceiling drama, 2017.

A very brief history of the debt ceiling

Once upon a time, whenever the federal government borrowed money, the bond issuance was specifically authorized by an act of Congress. But during World War I, American leaders decided this was too cumbersome and instituted a new policy whereby Congress would simply authorize such-and-such amount of borrowing and the Treasury would work out the details. Since this statutory debt ceiling wasn’t adjusted for inflation, economic growth, or the size of the population, it needed to be raised from time to time. In the era of the gold standard, deficits were normally low and it wasn’t a big deal.

But after Richard Nixon ended the convertibility of the dollar to gold — and especially after Ronald Reagan’s tax cuts blew up an unprecedented peacetime deficit — the debt ceiling became a kind of silly political football.

Congress establishes mandatory spending on programs like Social Security, Medicare, and Medicaid through the legislative process. There is, separately, an annual (or annual-ish) appropriations process by which Congress decides how much money the Pentagon and other discretionary agencies should spend in any given year. And separately from that, Congress every so often changes the tax code — which, combined with the ups and downs of economic life, determines how much money comes in.

The Treasury then sells bonds to make up the difference. But the selling of bonds does not by itself allow for any extra spending beyond what’s been authorized by law. All it does is prevent the federal government from reaching a calamitous situation in which it cannot pay bills that it is legally obligated to pay — including bills it owes to buyers of previous rounds of federal debt issuance.

Not raising the ceiling would be insane. But the need to raise it has traditionally offered opposition members of Congress an opportunity to do some grandstanding.

Back in 2006, freshman Sen. Barack Obama voted “no” on a debt ceiling increase. He didn’t actually attempt to argue that breaching the ceiling would be a good idea; he just voted no and then complained that “the fact that we are here today to debate raising America’s debt limit is a sign of leadership failure.”

A few years later, when Obama was president and Republicans seized a majority in the House of Representatives, the GOP flipped this logic around and demanded genuine policy concessions — eventually taking the form of the spending cuts known as sequestration — in exchange for raising the ceiling.

Brinksmanship didn’t work out well for anyone

The Obama administration initially welcomed the idea of using the need for a 2011 debt ceiling increase to force a negotiation over the long-term future of the national debt. Obama’s idea was to strike a deal whereby Democrats would agree to cuts in Social Security (most likely by changing the inflation index used to calculated cost of living adjustments) and Medicare (most likely by raising the retirement age), and Republicans, in exchange, would agree to higher taxes on the rich. Given that tax cuts enacted by George W. Bush were scheduled to expire at the end of 2012 anyway, this was a very generous offer from the White House.

But conservatives in the House turned it down, pushing party leaders to demand an all-cuts approach to deficit reduction.

The result was “sequestration” and the Budget Control Act, which mandated sharp cuts in discretionary spending equally split between military and nonmilitary programs. This accomplished the reverse of a barbell stimulus — hurting the economy with short-term austerity while doing nothing to alleviate the long-term issues.

After that unpleasant experience, debt ceiling wars began to wane. The furthest-right members of the GOP caucus continued to push for fights, but the ceiling was repeatedly “suspended” or raised through deals in which Democrats delivered most of the votes, but GOP leadership ensured enough Republicans would vote it for to pass. With Trump in the White House, there’s seemingly not much point in Republicans trying to pick a fight over this, and it could have been pretty smooth sailing.

But a White House leadership void has prompted new rounds of GOP infighting.

Republican disunity is giving Democrats leverage

Back on May 24, testifying before the House Ways and Means Committee, Treasury Secretary Steve Mnuchin played the customary role of the Treasury secretary in this drama and told Congress that it should raise the debt ceiling.

“I urge you,” he said, “to raise the debt limit before you leave for the summer.”

It didn’t happen, in part because Trump’s own Office of Management and Budget director wasn’t in agreement with Mnuchin on the desirability of a clean increase. OMB Chief Mick Mulvaney finally got on board late last week, but by then Congress was already on its way out the door, with Republicans licking their wounds from the health care fight. But the president himself has been silent on the issue, and backbench House conservatives don’t seem interested in a clean increase.

“A clean debt ceiling hike is like having a credit card and saying, 'I've reached my limit; I'm just going to change the limit higher without changing any of my spending habits,’” Tom Cole (R-OK) told Morning Joe on Tuesday. “That’s a tough sell to Republicans.”

This is, in reality, a pretty terrible analogy on all fronts. But outside conservative groups like Heritage Action are mobilizing to oppose a debt ceiling increase. For a while now, FreedomWorks has been pushing legislation that would explicitly authorize the Treasury to transform a debt ceiling breach into something more like a conventional government shutdown.

The result is that any debt ceiling bill is going to need Democratic votes to pass the House — potentially giving Democrats some leverage, if they want to use it.

Will Democrats make demands?

Most Democrats on Capitol Hill seem content to lay low, not say much until the last possible minute, watch Republicans fight among themselves, and then deliver the necessary votes for a debt ceiling increase when the time comes. Nobody in the Democratic caucus genuinely wants to see a debt ceiling breach, and the party came down so hard against GOP brinksmanship in 2011 that there is a heavy stigma against engaging in a new round of it. Simply playing the issue to embarrass Republican leaders is good enough for most Democrats.

But there are some rumblings of discontent with this position.

One line of argument has to do with the looming debate over “tax reform” — which, with Mitch McConnell saying he’s looking to move a partisan bill with 50 votes, will almost certainly amount to a debt-increasing tax cut for corporations and affluent families.

Back in early June, Democratic leaders — including Nancy Pelosi and Chuck Schumer — hinted that they would try to link the debt ceiling issue to a demand that tax reform not increase the deficit. But then about a week later, Pelosi backed off that stance, and Schumer seems disinclined to pick a fight either. But Dick Durbin (D-IL) still seemed interested in attempting some kind of linkage last week, and for Democrats eager to make some base-pleasing gestures of “resistance” by taking a stand against a compromise with the unpopular Trump administration, last-minute qualms could seem tempting.

A somewhat more wonk-friendly approach, endorsed by Brian Schatz (D-HI), would be for Democrats to insist on abolishing the debt ceiling altogether, rather than lifting it.

The substantive benefit would be to remove the threat of politically induced default forever. Politically, Democrats would ensure that Obama-era brinksmanship tactics wouldn’t simply return when Trump is out of the White House.

For now, though, Democratic leaders simply say that Republicans — especially House Republicans — need to make the first move and introduce legislation. Most likely they will do so shortly after recess, and mostly likely when they do, enough Democrats will come along to pass the bill. But so far, that’s all speculation. None of the work has actually been done. And there’s precious little time left in which to do it.